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Executive pay commonly combines fixed salary, annual incentives and longer-term awards, often tied to company stock. The targets can include financial results, operating measures, strategic priorities and shareholder returns. The exact mix, time period and payout rules vary by company, so the clearest way to understand an incentive plan is to examine its proxy statement rather than rely on a general claim such as “pay for performance.”
Three building blocks of executive compensation
Base salary: fixed pay
Base salary is the fixed cash component. McKesson’s 2026 proxy describes salary alongside annual and long-term incentive elements. Salary is distinct from incentive pay: it is not itself a bonus for meeting a particular performance target.
Annual incentives: shorter-term results
An annual incentive typically awards cash based on performance over a shorter period, often a year. McKesson’s FY 2026 program, for example, lists adjusted earnings per share (EPS), adjusted operating profit and free cash flow as measures. The company also describes nonfinancial priority areas as a downward-only modifier: they can reduce the annual award, not increase it.
Long-term incentives: results and service over time
Long-term incentives generally cover multiple years and can combine performance conditions, stock value and continued service. They may be delivered as performance-based stock units (PSUs or PRSUs), time-vesting restricted stock units (RSUs), or other forms of equity. Dycom’s 2026 proxy describes performance-vesting and time-vesting RSUs; Lam Research’s describes market-based PRSUs alongside service-based RSUs. Those forms do not measure the same thing: a performance award depends on specified results, while a time-vesting award generally depends on remaining employed through a vesting schedule.
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What targets can reward
Companies select measures that reflect their own businesses and stated priorities. Current examples in 2026 U.S. proxy statements include:
- Financial results: adjusted EPS, adjusted operating profit, free cash flow, sales and operating income.
- Returns: return measures and shareholder return, including performance compared with peers or a market benchmark.
- Strategic or operating priorities: goals that go beyond a single earnings measure and are connected by the company to its business priorities.
Walmart’s fiscal 2026 compensation framework describes sales, operating income and return measures. Target’s 2026 proxy describes relative performance in its PSU program. These examples illustrate possible measures; they do not establish how frequently each measure is used across companies or industries.
Read the issuer’s own definition of each measure. “Adjusted” or other non-GAAP metrics can be defined differently from one company to another, so the label alone does not tell you which items are included or excluded.
How goals become payouts
Targets may be tied to operating plans
A target is not necessarily last year’s result plus a fixed increase. Pfizer’s 2026 proxy says its annual incentive targets are derived from its annual operating plan and a bottom-up budgeting process, which can produce goals above or below prior-year targets or actual performance. The proxy also notes that events outside executives’ control can affect some measures.
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Payout curves set the consequences of performance
A plan may define threshold, target and maximum performance levels, then use a payout curve to determine how much is earned at each result. Target’s 2026 proxy describes goals approved around the beginning of the performance period and payout curves, including relative peer performance for its PSU program. The details matter: a target opportunity is not the same as an actual payout, and a target listed in a proxy does not mean it was achieved.
Modifiers, discretion and unusual events matter
When a company discloses them, check whether a committee can adjust the result, whether unusual events are treated specially, and whether a modifier can raise or only reduce the award. McKesson’s nonfinancial priority modifier, for example, is described as capable only of reducing annual incentive payouts. Do not infer that another plan has the same rule.
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How to compare two incentive plans
Use the same questions for each company, and compare disclosed rules rather than labels or stated intentions alone.
| What to compare | What to look for |
|---|---|
| Time horizon | Is the measure tied to annual results, multi-year performance, or both? |
| Award form | Is the award cash, stock, options, restricted stock, performance shares, or a blend? |
| Performance measure | Does it measure accounting or operating results, strategic milestones, shareholder return, or performance against peers? |
| Executive influence | Can executives materially affect the measure, or could external conditions dominate the result? |
| Payout design | Are threshold, target and maximum levels, caps, multipliers, modifiers or committee discretion disclosed? |
| Strategic trade-offs | Could meeting a short-term target encourage decisions that work against durable performance? |
Walmart says its goals are intended to align with enterprise strategy and key performance indicators executives can influence. McKesson describes its measures as linked to operational objectives and shareholder value. Those are the companies’ explanations of their programs; proxy disclosures do not, by themselves, prove that a plan caused better performance.
What proxy statements can—and cannot—tell you
A proxy statement is primary evidence of what a particular issuer says its compensation program includes. For an individual plan, use its disclosures to identify the performance period, metric definitions, weights, payout levels, adjustment rules and any committee discretion. The examples here come from 2026 proxy statements for Walmart, McKesson, Target, Dycom, Lam Research and Pfizer; they show variation, not a representative survey of the market.
These company examples do not establish a market-wide percentage for how often a particular incentive design is used, or whether one design improves company performance. Treat disclosed rationales as the issuer’s stated rationale, not independent proof of cause and effect.
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